Best way to cut a groove around circumference of irregularly shaped object
The first thing I would recommend is retopoligizing and cleaning up your mesh. CG Cookie literally released a whole flow on retopoligizing not long ago so I would recommend trying that out (it does cost however). The other thing you could use if you don't mind spending about $70 is retopoflow. Very good resource from the blender market.

It is important to keep topology into consideration because it firstly makes overall editing very easy, and it allows you to properly use the sub-surf modifier for a smooth finish.

Once you have retopologized this, you will have a very nice simple mesh. Creating a grove around it should not be difficult. Just add in some edge loops and extrude inwards.